Arbitration agreements and non-disclosure agreements (NDAs) have recently been in the news due to the sexual harassment scandals involving politicians in Washington, D.C. and Sacramento, as well as members of the media and Hollywood moguls. Readers should be aware that these agreements are two separate and distinct types of legal documents, yet both are being targeted for elimination by the plaintiff’s bar.

To distinguish the two, an arbitration agreement is basically a written contract in which two or more parties agree to settle a dispute outside of court by use of an alternative dispute resolution process (i.e., they agree on a different venue in which to resolve their legal dispute). On the other hand, a non-disclosure agreement is a contract by which one or more parties agree not to disclose information that they have shared with each other.

So why are they being targeted for elimination? The plaintiff’s bar has long sought to limit or outright prohibit arbitration (unless agreed to after the dispute has already arisen) because attorneys are less likely to be compensated as well in arbitration than in traditional court litigation. With the public attention being drawn to sexual harassment claims, the plaintiff’s bar sees an opportunity to enhance their chances of success.

However, while elimination of non-disclosure agreements would make it less likely that claims of sexual harassment are kept secret, that should be distinguished from doing away with arbitration agreements. In other words, critics of keeping claims and pay-outs secret by use of non-disclosure agreements plan to pursue legislation to ban them. But banning arbitration in the employment context is not the right response.

First, it is the non-disclosure agreements, or non-disclosure provisions, rather than an arbitration agreement itself, that keep allegations and pay-outs secret. Had Harvey Weinstein not been able to have his victims sign non-disclosure agreements, then his disgusting actions would not have been hidden from the public’s view. But the same should not apply to arbitration (merely the choice of venue to resolve the dispute) in California. Why is that?

One of the most common allegations about arbitration from its opponents is that “arbitration is a secret process.” Worse than that, those same opposition groups claim that arbitration is “essentially unregulated”. Nothing could be further from the truth here in California. Arbitrators are, in fact, regulated and we know much more about arbitration in this state than elsewhere across the country.

How are arbitrators regulated in California? Code of Civil Procedure Section 1281 sets forth mandatory arbitration disclosures that are required to be made to the parties so that they can choose an impartial arbitrator to resolve their dispute. Moreover, in July 2002, the Judicial Council adopted disclosure rules for arbitrators.

As a result, there are numerous disclosures under Standard 7 of the California Rules of Court “that could cause a person aware of the facts to reasonably entertain a doubt that the arbitrator would be able to be impartial” (note this high standard to be met). Standard 7 provides an important threshold for arbitrators to meet to ensure they will be impartial in resolving the parties’ dispute.

Among the required disclosures for arbitrators are the following: Any family relationships with a party; family relationships (current and past) with a lawyer in the arbitration; significant personal relationships with a party or lawyer for a party; service as an arbitrator for a party or a lawyer for a party; compensated service as other dispute resolution neutral; current arrangements for prospective neutral service; attorney-client relationship; employee, expert witness, or consultant relationships; other professional relationships; financial interests in a party; financial interests in the subject of the arbitration; affected interest; knowledge of disputed facts; and, membership in organizations practicing discrimination.

How strictly are these disclosure requirements enforced? An example is provided in California’s Second Appellate District which vacated an arbitral award in Mt. Holyoke Homes v. Jeffer Mangels Butler & Mitchell, 2013 WL 5321158, 2013 Cal. App. Lexis 765 (CA Dist. 2 Ct. App., Sept. 25, 2013), because the sole arbitrator had failed to disclose that a partner of the defendant law firm was listed as a reference on the arbitrator’s decade-old, online resume.

Moreover, the two major arbitration providers in this state (AAA and JAMS) both have extensive disclosure rules that their arbitrators must follow. As a result, there are more disclosures by arbitrators than required by judges in this state. Those utilizing arbitrators have an ability to determine any potential conflicts involving arbitrators who may decide their dispute.

In addition, arbitrations in California are hardly “secret”. Although that may be the case in other states, here in California we know a lot about arbitrations because of required disclosures that must be made by arbitration companies. California Code of Civil Procedure Section 1281.96 requires private arbitration companies involved in consumer arbitrations to publish specific information about every consumer arbitration they administer.

Contrary to opponents’ claims that arbitration is confidential without any public access or knowledge, California law requires a quarterly report by all private arbitration companies that administer arbitrations in California. These quarterly reports must be published on the arbitration company’s website, available to download without a fee, as well as available in a hard copy format with specified information, including the nature of the dispute, amount of the award and the percentage of the arbitrator’s fee allocated to each party.

In 2002, the California Legislature enacted this landmark legislation to collect some basic information regarding mandatory contractual arbitrations. What is required to be reported by these companies? The type of disposition; mandatory arbitration clauses and designated arbitrators; previous arbitrations with the firm; arbitrator fees and allocations; claimed amount; salary range; prevailing party; and, awarded amount.

Of course, the existence of an arbitration agreement does not preclude a party from filing a lawsuit (the other party may then seek to compel arbitration), or challenging the arbitration agreement itself (that it is procedurally and substantively unconscionable), or making public any claims against the other party in public (particularly with the availability of social media).

Additionally, California courts have provided protections to employees to ensure arbitration agreements that are mandatory (i.e., the employee was required to sign the agreement as a condition of employment) still protect the employee. In other words, employment arbitration agreements must comply with the following requirements established by the California Supreme Court in Armendariz v Foundation Health Psychcare Services, Inc (24 Cal 4th 83 (2000)):

Readers should also be aware that, despite a policy rationale that supports the confidentiality of arbitration documents, the competing policy interest in favor of public access to judicial records often triumphs and it appears that a majority of courts have not sealed records solely on the basis of an existing arbitration confidentiality agreement between the parties.

Finally, the increased publicity of sexual harassment claims and a stated desire to promote transparency resulted in the federal tax bill adopting Section 13307 of the bill to deny a deduction (for ordinary and necessary expenses paid for running a business) for settlements that are subject to nondisclosure agreements paid in connection with sexual harassment or sexual abuse.

Internal Revenue Code Section 162 was amended to specify that “no deduction shall be allowed for any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or attorney’s fees related to such a settlement or payment.” As a result, a business will need to determine whether any amount paid to settle a sexual harassment claim is significant enough to be worth the deduction. If so, the settlement agreements cannot include nondisclosure agreements.

While nondisclosure agreements can serve a legitimate purpose such as to preclude distributing or misusing employers’ confidential or proprietary information, they should not be used to prevent victims from speaking out or reporting harassment or abuse. However, that is different than prohibiting the use of mandatory arbitration agreements to resolve legal disputes between employers and employees. While sexual misconduct in the workplace should not be concealed, that can be accomplished with limiting the use of NDAs. It does not require limiting or prohibiting the use of arbitration agreements.